Top

The Annals of Regional Science

Published in:

06-01-2022 | Original Paper

Fiscal decentralization, regional disparity, and the role of corruption

Authors: Nupur Nirola, Sohini Sahu, Atrayee Choudhury

Published in: The Annals of Regional Science | Issue 3/2022

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

In this study, we examine how efforts taken by states to combat corruption act as a mediator in the relationship between fiscal decentralization and regional income disparities. Fiscal decentralization may affect regional disparities via access to funding, but corruption could limit the ability to efficiently transfer fiscal resources. India is one of the most decentralized nations of the world and also exhibits high regional disparities. Under this scenario, we estimate whether institutions, in the form of anti-corruption efforts by the states, interact with fiscal decentralization and affect divergence across states of India. We find that fiscal decentralization reduces the disparity across states, and the effect of fiscal decentralization is stronger under efforts to control corruption by state vigilance bodies. The results are robust across different specifications of fiscal decentralization and alternate estimation methods accounting for endogeneity. From the policy perspective, in order to harness the potential benefits of decentralization to reduce regional income disparities, governments should focus on improving the quality of institutions through control on corruption at the sub-national level.

previous article Spatial machine learning: new opportunities for regional science

next article The great recession and job loss spillovers: impact of tradable employment shocks on supporting services

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Technik"

Online-Abonnement

Mit Springer Professional "Technik" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 390 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Maschinenbau + Werkstoffe

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

The National Development Council of India has characterized the states into special category states (SCS) and non-special category states (NSCS). Special category states include the following features:1. hilly and difficult terrain, 2. low population density and/or sizeable share of tribal population, 3. strategic location along borders with neighboring countries, 4. economic and infrastructural backwardness, and 5. non-viable nature of state finances. Till now, 11 states are part of SCS (Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura, Jammu and Kashmir, Assam, and Nagaland). The NSCS are Andhra Pradesh, Bihar, Chhattisgarh Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal. Since the special category states get preference in terms of financial transfers from the Central government, only non-special category states have been included in our analysis.

These states are Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal.

See studies Chaudhuri, K., & Dasgupta, S. (2006), Dash, B. B., & Raja, A. V. (2012), Dash, B. B. (2014), Ganaie, A. A. et al. (2018), Bhat S.A. et al. (2018).

General government includes the central government, the state government, and the local government.

https://data.imf.org/?sk=1C28EBFB-62B3-4B0C-AED3-048EEEBB684F.

We thank an anonymous referee who highlighted this feature related to corruption control efforts.

Akai N, Hosio M (2009) Fiscal decentralization, commitment, and regional inequality: evidence from state-level cross-sectional data for the United States. J Income Distrib 18(1):113–129CrossRef

Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297CrossRef

Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error components models. J Econo 68(1):29–51CrossRef

Bardhan P (2002) Decentralization of governance and development. J Econ Perspect 16(4):185–205CrossRef

Bardhan PK, Mookherjee D (2000) Capture and governance at local and national levels. Am Econ Rev 90(2):135–139CrossRef

Barro RJ (2001) Human capital and growth. Am Econ Rev 91(2):12–17CrossRef

Beck N, Katz JN (1995) What to do (and not to do) with time-series cross-section data. Am Politic Sci Rev 89(3):634–647CrossRef

Beland D, Lecours A (2010) Does nationalism trigger welfare-state disintegration? Social policy and territorial mobilization in Belgium and Canada. Eviron Plann C Gov Policy 28(3):420–434CrossRef

Bhat SA, Ganaie AA, Khan NA, Kamaiah B (2018) Grants-in-aid and state domestic product: an empirical analysis in India. Challenges and issues in Indian fiscal federalism. Springer, Singapore, pp 107–120CrossRef

Blackburn K, Forgues-Puccio G (2009) Why is corruption less harmful in some countries than in others? J Econ Behav Organ 72:797–810CrossRef

Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econo 87(1):115–143CrossRef

Bodman P, Hodge A (2010) What drives fiscal decentralisation? Further assessing the role of income. Fisc Stud 31(3):373–404CrossRef

Bojanic AN (2020) The empirical evidence on the determinants of fiscal decentralization. Rev Finanzas y Polític Econ 12(1):271–302

Bonet J (2006) Fiscal decentralization and regional income disparities: evidence from the Colombian experience. Ann Reg Sci 40(3):661–676CrossRef

Brennan G, Buchanan J (1980) The power to tax: analytical foundations of a fiscal constitution. Cambridge University Press, Cambridge

Cai H, Treisman D (2004) State corroding federalism. J Public Econ 88(3–4):819–843CrossRef

Calamai L (2009) The link between devolution and regional disparities: evidence from the Italian regions. Environ Plan A 41(5):1129–1151CrossRef

Campbell HF (2003) Are culturally diverse countries more fiscally decentralized? In: Harry Bloch (ed) Growth and Development in the Global Economy, chapter 12. Edward Elgar Publishing, pp 203

Canaleta CG, Pascual Arzoz P, Rapun Garate M (2004) Regional economic disparities and decentralisation. Urban Stud 41(1):71–94CrossRef

Centre for Media Studies (2005) India corruption study 2005: to improve governance. Transparency International India, New Delhi

Chakravarty P, Dehejia V (2016) India’s curious case of economic divergence. IDFC Briefing Paper, pp 3

Charron N, Dijkstra L, Lapuente V (2010) Mapping quality of Government in the European union: a study of national and sub-national variation (No. 2010:22). Gothenburg.

Chaudhuri K, Dasgupta S (2006) The political determinants of fiscal policies in the states of India: an empirical investigation. J Dev Stud 42(4):640–661CrossRef

Cherodian R, Thirlwall AP (2015) Regional disparities in per capita income in India: Convergence or divergence? J Post Keynes Econ 37(3):384–407CrossRef

Dash BB (2014) Regional income disparity and government intervention in India: evidence from sub-national data. South Asia Econ J 15(2):281–314CrossRef

Dash BB, Raja AV (2012) Political determinants of the allocation of public expenditure: a study of the Indian states. National Institute of Public Finance and Policy, New Delhi

Debroy B, Bhandari L (2012) Corruption in India: the DNA and the RNA. Konark Publishers, New Delhi

Ezcurra R, Rodríguez-Pose A (2014) Government quality and spatial inequality: a cross-country analysis. Environ Plan A 46(7):1732–1753CrossRef

Ganaie AA, Bhat SA, Kamaiah B, Khan NA (2018) Fiscal decentralization and economic growth: evidence from Indian States. South Asian J Macroecon Pub Finance 7(1):83–108CrossRef

Garman C, Haggard S, Willis E (2001) Fiscal decentralization: a political theory with Latin American cases. World Pol 53(2):205–236CrossRef

Ghate C, Wright S (2013) Why were some Indian States so slow to participate in the turnaround? Econ Pol Weekly 48(13):118–127

Gyimah-Brempong K, de Gyimah-Brempong SM (2006) Corruption, growth, and income distribution: Are there regional differences? Econ Gov 7(3):245–269CrossRef

Iyer L, Ghani E, Mishra S (2010) Is decentralization helping the lagging regions? Half Billion, p. 257

Jin Y, Rider M (2020) Does fiscal decentralization promote economic growth? An empirical approach to the study of China and India. J Publ Budget Account Financ Manag. https://doi.org/10.1108/JPBAFM-11-2019-0174CrossRef

Kanbur R, Zhang X (2005) Fifty years of regional inequality in China: a journey through central planning, reform, and openness. Rev Dev Econ 9(1):87–106CrossRef

Kappeler A, Välilä T (2008) Fiscal federalism and the composition of public investment in Europe. Eur J Polit Econ 24(3):562–570CrossRef

Kar S, Saha S (2013) Corruption, inequality and the shadow economy: evidence from Asia. In: 22nd annual conference on contemporary issues in development economics, Jadavpur University, January, Jadavpur University, Kolkata, India, pp 3–4

Keen M, Marchand M (1997) Fiscal competition and the pattern of public spending. J Pub Econ 66(1):33–53CrossRef

Kim E, Hong SW, Ha SJ (2003) Impacts of national development and decentralization policies on regional income disparity in Korea. Ann Reg Sci 37(1):79–91CrossRef

Krugman PR (1986) Strategic trade policy and the new international economics. MIT Press, Cambridge

Kumar U, Subramanian A (2012) Growth in India's states in the first decade of the 21st century: four facts. Economic and political weekly, pp. 48–57.

Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45(1):1–28

Kyriacou AP, Muinelo-Gallo L, Roca-Sagalés O (2015) Fiscal decentralization and regional disparities: the importance of good governance. Pap Reg Sci 94(1):89–107

Kyriacou AP, Muinelo-Gallo L, Roca-Sagalés O (2017) Regional inequalities, fiscal decentralization, and government quality. Reg Stud 51(6):945–957CrossRef

La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15(1):222–279CrossRef

Lessmann C (2009) Fiscal decentralization and regional disparity: evidence from cross-section and panel data. Environ Plan A 41(10):2455–2473CrossRef

Lessmann C (2012) Regional inequality and decentralization: an empirical analysis. Environ Plan A 44(6):1363–1388CrossRef

Liu Y, Martinez-Vazquez J, Wu AM (2017) Fiscal decentralization, equalization, and intra-provincial inequality in China. Int Tax Public Financ 24(2):248–281CrossRef

Martinez-Vazquez J, Timofeev A (2008) Regional-local dimension of Russia’s fiscal equalization. J Comp Econ 36(1):157–176CrossRef

Muringani J, Dahl Fitjar R, Rodríguez-Pose A (2019) Decentralisation, quality of government and economic growth in the regions of the EU. Rev De Econ Mundial 51:25–50

Musgrave R (1959) The theory of public finance: a study in public economy. McGraw-Hill, New York

Myrdal GRL (1957) Poor: the road to world poverty. Harper & Row, New York

Oates W (1972) Fiscal federalism. Harcourt Brace Jovanovich, New York

Oates WE (1993) Fiscal decentralization and economic development. Natl Tax J 46(2):237–243CrossRef

Oates WE (1999) An essay on fiscal federalism. J Econ Lit 37(3):1120–1149CrossRef

Panizza U (1999) On the determinants of fiscal centralization: theory and evidence. J Public Econ 74(1):97–139CrossRef

Parks R (1967) Efficient estimation of a system of regression equations when disturbances are both serially and contemporaneously correlated. J Am Stat Assoc 62:500–509CrossRef

Pike A, Rodríguez-Pose A, Tomaney J, Torrisi G, Tselios V (2012) In search of the ‘economic dividend’ of devolution: spatial disparities, spatial economic policy, and decentralisation in the UK. Eviron Plann C Gov Policy 30(1):10–28CrossRef

Prud’Homme R (1995) The dangers of decentralization. World Bank Res Obs 10(2):201–220CrossRef

Qian Y, Weingast BR (1997) Federalism as a commitment to reserving market incentives. J Econ Perspect 11(4):83–92CrossRef

Qiao B, Martinez-Vazquez J, Xu Y (2008) The tradeoff between growth and equity in decentralization policy: China’s experience. J Dev Econ 86(1):112–128CrossRef

Quah JS (2008) Curbing corruption in India: An impossible dream? Asian J Pol Sci 16(3):240–259

Rao MG (2002) Fiscal decentralization in Indian federalism, Routledge, pp. 302–321

Rao MG, Shand RT, Kalirajan KP (1999) Convergence of incomes across Indian states: a divergent view. Economic and political weekly, pp. 769–778

Rodríguez-Pose A (2013) Do institutions matter for regional development? Reg Stud 47(7):1034–1047CrossRef

Rodríguez-Pose A, Bwire A (2004) The economic (in) efficiency of devolution. Environ Plan A 36(11):1907–1928CrossRef

Rodríguez-Pose A, Ezcurra R (2009) Does decentralization matter for regional disparities? A cross-country analysis. J Econ Geo 10(5):619–644CrossRef

Rodríguez-Pose A, Gill N (2004) Is there a global link between regional disparities and devolution? Environ Plan A 36(12):2097–2117CrossRef

Rodríguez-Pose A, Zhang M (2019) Government institutions and the dynamics of urban growth in China. J Reg Sci 59(4):633–668CrossRef

Sacchi A, Salotti S (2014) How regional inequality affects fiscal decentralisation: accounting for the autonomy of subcentral governments. Eviron Plann C Gov Policy 32(1):144–162CrossRef

Singh N, Bhandari L, Chen A, Khare A (2003) Regional inequality in India: a fresh look. Econ Pol Week. https://doi.org/10.2139/ssrn.377001CrossRef

Song Y (2013) Rising Chinese regional income inequality: the role of fiscal decentralization. China Econ Rev 27:294–309CrossRef

Tabellini G (2005) The role of the state in economic development. Kyklos 58(2):283–303CrossRef

Tanzi V (1998) Corruption around the world: Causes, consequences, scope, and cures. Staff Papers 45(4):559–594CrossRef

Tanzi V (2005) The economic role of the state in the 21st century. Cato J 25(3):617–638

Tanzi V (2000) On fiscal federalism: issues to worry about. In: Conference on Fiscal Decentralization, IMF. Fiscal Affairs Department, Washington DC

Tiebout CM (1956) A pure theory of local expenditures. J Polit Econ 64(5):416–424CrossRef

Torrisi G, Pike A, Tomaney J, Tselios V (2015) (Re-) exploring the link between decentralization and regional disparities in Italy. Reg Stud Reg Sci 2(1):123–140

Voitchovsky S (2005) Does the profile of income inequality matter for economic growth? J Econ Growth 10(3):273–296CrossRef

You J, Khagram S (2004) Inequality and corruption, In: Hauser center for nonprofit organizations working Paper No. 22; KSG Working Paper No. RWP04–001

Title: Fiscal decentralization, regional disparity, and the role of corruption
Authors: Nupur Nirola
Sohini Sahu
Atrayee Choudhury
Publication date: 06-01-2022
Publisher: Springer Berlin Heidelberg
Published in: The Annals of Regional Science / Issue 3/2022
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI: https://doi.org/10.1007/s00168-021-01102-w

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Technik"

Other articles of this Issue 3/2022

Correction to: The effect of bank branch closures on new firm formation: the Swedish case

The great recession and job loss spillovers: impact of tradable employment shocks on supporting services

Spatial machine learning: new opportunities for regional science

One size does not fit all: evaluating the impact of microenterprise measurement on policy evaluation

Correction to: Macroeconomic and environmental consequences of circular economy measures in a small open economy

Knowledge networks in joint research projects, innovation and economic growth across European regions